Contracts Matter: Subcontractor Required to Pay General Contractor’s Legal Bills

August 18, 2008

Should a subcontractor be required to pay the legal expenses to defend a builder against a construction defect lawsuit, when the subcontractor did not cause those defects? Yes, under a 2008 California court opinion and very likely under Wisconsin law. The court ordered the subcontractor to pay the builder, even though their contract stated that the subcontractor only had to defend the builder against claims related to the subcontractor’s work. [1] This case underscores the critical importance of paying attention to and understanding the allocation of responsibilities within a contract.

A subcontractor installed windows in a builder’s residential development. The parties’ contractual indemnity clause [2] stated that the subcontractor would pay any legal fees required to defend the builder against claims arising from the subcontractor’s work. After leaking windows had caused extensive property damage, homeowners sued the builder and subcontractor. A jury found that the builder, but not the subcontractor, was liable for the damage. Nevertheless, the builder demanded that the subcontractor pay all its legal bills from defending against the homeowners’ lawsuit.

The trial court ruled that because the subcontractor was not responsible for any of the damage, it did not have to pay the homeowners for the defective construction. However, the trial court did order the subcontractor to pay the builder’s legal bills as required under their contract. The court reasoned that the subcontractor’s promise to defend the builder amounted to a contractual requirement that the subcontractor defend the builder, and that duty applied regardless of whether or not the subcontractor was responsible for any construction defects. The subcontractor appealed, arguing that it had no duty to defend the builder from a lawsuit when it was not ultimately responsible for the construction defects.

The state supreme court held that an indemnity clause creates an immediate duty in the first contractual party to defend against all potential harm to the second party. This duty includes paying the legal fees required to defend the second party against a pending lawsuit. This indemnity duty exists regardless of whether or not the first party was responsible for any damage. Also, the contractual duty to indemnify begins as soon as the second party is sued, and continues until the issue has been resolved. The first party cannot wait until the court awards a judgment against the second party before its duty to defend begins. In addition, if the first party does not live up to its contractual indemnity obligation, it will typically be ordered to also pay the legal costs that the second party spends to compel the indemnity.

Thus, based on the parties’ contract, the subcontractor was required to pay all the legal expenses of defending the builder against any construction defect claim involving the windows. This requirement existed regardless of the ultimate result of the lawsuit, and even though the subcontractor was not responsible for any construction defects.

A Wisconsin court would likely rule similarly. Wisconsin courts enforce clear and unambiguous indemnity clauses. [3] Additionally, a Wisconsin indemnity clause generally will not protect against negligent damage unless such a provision is explicitly included in the contract.[4] Indemnity agreements are not limited to construction defects and can apply to other risks such as workplace injuries, which would normally be covered under the Workmen’s Compensation Act. [5] However, parties are prohibited from reducing tort liability in a construction contract.[6] Nevertheless, they can agree to shift all liability for tort damages to one party through an indemnity clause. [7]

The bottom line is that if you sign a construction contract without reading it thoroughly and carefully, you may be responsible for someone else’s poor workmanship.

If you would like to add or understand an indemnity clause in your contracts, contact Robert Procter at 608.260.2762, or Buck Sweeney at 608.260.2743, The authors thank Wes Taylor for his assistance with this article.

[1] Crawford v. Weather Shield Mfg. Inc., 187 P.3d 424 (Cal. 2008).
[2] An agreement where one party promises to protect the other against a possible loss, damage or injury.
[3] State v. Peppertree Resort Villas, Inc., 2002 WI App 207 ¶ 14.
[4] Mikula v. Miller Brewing Co., 2005 WI App 92 ¶ 34.
[5] Schaub v. West Bend Mut., 195 Wis.2d 181, 187 (Wis. App. 1995).
[6] Wis. Stat. § 895.447 (2005-06).
[7] Gerdmann by Habush v. U.S. Fire Ins. Co., 119 Wis.2d 367, 374 (Wis. App. 1984).

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